The decision whether you should consolidate your loans is complicated. Consolidation does not always save you money or make the loan easier to repay. This article discusses some of the reasons for and against consolidation.

Consolidation of federal student loans provides access to alternate repayment plans that can reduce the monthly loan payment by increasing the term of the loan. This can free up money to repay loans with higher interest rates, such as credit cards, that also do not provide tax-deductible interest.

If your lender does not offer income-based repayment on your federal student loans, you can obtain income-based repayment by consolidating the loans into the Direct Loan program at StudentLoans.gov.

Consolidation can also reduce the loan payment even without a change in repayment term if some of the separate loans were affected by minimum payment requirements. Consolidation can also reset the loan term, which can lead to a reduction in the monthly payment if you have been in repayment for several years.

If your credit scores have improved, private consolidation may yield a lower interest rate. (With variable-rate federal student loans, federal consolidation could be used to lock in the current rate on the loans, protecting the loans against interest-rate increases.)

Consolidation may be used to switch lenders, if you don't like your current lender.

Consolidation can reset the clock on deferments and forbearances. A consolidation loan is a new loan with a fresh time limit on deferments and forbearances. Time-limits are based on the loans, not the borrower.

* Default = 270 days late/missed payment on a federal loan and typically 90 days late/missed payment on a private loan (contact your lender for exact definition of default).

Why Not Consolidate?

While consolidation may yield a lower monthly payment because of a longer repayment term, a longer repayment term may cause you to pay more interest over the life of the loan. Some borrowers are tempted to choose the repayment plan with the lowest monthly payment, even when they can afford to make a higher monthly payment. Choosing a longer repayment term also often means that you may still be repaying your student loans when your children enroll in college.

If the interest rates on the separate loans differ significantly, you may be able to save money by accelerating repayment of the loans with the highest interest rate. You cannot target the highest-rate loans for early repayment if the loans have been consolidated.

Private student loan consolidation too soon after graduation may yield a higher interest rate. Typically, credit scores decrease and interest rates increase with each year in school due to increased credit utilization. By the time you graduate, the interest rates are at a peak. It takes several years of responsible repayment behavior on all debts for your credit score to improve enough to yield a lower interest rate.

Consolidating fixed-rate federal student loans does not save you any money, since the interest rate on a federal consolidation loan is based on the weighted average of the interest rates on the loans included in the consolidation loan. It may even increase the costs slightly, since the weighted average interest rate is rounded up to the nearest 1/8th of a point.

You lose the remainder of any eligible grace period on your loans when you consolidate.

Accrued but unpaid interest is capitalized when federal education loans are consolidated, causing interest to be charged on interest.

You do not need to consolidate federal student loans to get extended repayment. With consolidation, extended repayment bases the repayment term on the amount of debt. If you have $30,000 or more in federal student loan debt, you can get 25-year extended repayment without consolidating your loans.

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